FOMC minutes and CPI suggest one and done

USD: Sticky CPI begins to signal declines coming

On first glance yesterday, the CPI data told a familiar story – the stickiness of underlying core inflation in the US persisted in March while the energy related base effects played an important role in bringing headline inflation lower. In that regard the 15bp plunge in the 2yr UST note yield in response to the data was surprising. That reaction didn’t hold though and it’s no real surprise to us that as we write, the rates market has recouped about half of that yield drop that took place in response to the inflation data. The 2yr yield is about 6bps below the pre-inflation data release level while the OIS market indicates 18bps of tightening priced for the FOMC meeting on 3^rd May, exactly the same as before the release.

We would now argue with more conviction that the inflation data is turning more favourable and there is enough there for the Fed to pause, although with activity data, like the jobs market not yet weakening notably, the Fed seems more likely to hike again on 3^rd May. This is also indicative of comments from Fed officials that appear to err more on the side of hiking again. New York Fed President Williams is the latest with comments yesterday indicative of another FOMC member who will argue for a 25bp hike at the meeting. The FOMC minutes last night also on balance suggested the FOMC remains concerned enough over upside inflation risks to hike again. However, the rates market priced for cuts by year-end will be supported by the Fed staff view of a “mild recession starting later this year”. The minutes revealed a general view of rate projections being similar to December – implying one further 25bp rate hike.

The CPI data yesterday did offer up pretty compelling evidence that we have seen a turn in the underlying inflation tracked by the Fed as a key gauge of domestically-driven inflation pressures. The core services, ex-housing CPI measure, increased 0.4% m/m in March and 5.8% y/y. However, the 6mth annualised rate has slowed markedly to just below 4.0%, the lowest rate since January 2022. The longer the period you annualise the more reliable an indicator of trend it is and this is compelling evidence of a turn lower in the annual rate has begun. We believe another hike on 3^rd May is not necessary but see nothing in rhetoric or in the minutes released last night to suggest the FOMC will not hike at that meeting. We certainly expect a hike then to be the last.

The fact that the minutes reveal a staff projection of recession this year will certainly help reinforce the current expectations of rate cuts by the end of the year. With rate cuts priced it is difficult to envisage a change in the current momentum favouring mild US dollar depreciation. The EUR/USD intra-day year-to-date high of 1.1033 in early February remains the key level that if broken could well propel the dollar further weaker over the short-term.

UNDERLYING US CPI IS SLOWING NOTABLY

Source: Macrobond & MUFG GMR

CAD: BoC holds again but signals higher for longer

USD/CAD dropped in response to the US CPI data and then rebounded as US rates rebounded but fell again in response to the BoC policy announcement and communications that suggested the BoC remains cautious and is nowhere close to easing its monetary stance. The swings in CAD were modest though and that reflected a lack of any major surprises as it is certainly no surprise for the BoC to maintain a hawkish message this early into its period of monetary pause. This is especially so given the general flow of economic data releases have been more positive than many expected (perhaps including ourselves, although it is early days still in that period of pause).

The key guidance statement was altered slightly to give it a clearer bias to indicate the risk of more tightening being required – the “Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further….”. In March the statement read that the “Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further….”. So the assessment now is more explicitly about whether policy is restrictive enough. The forecasts also revealed a much stronger YoY GDP rate by Q4 this year, 1.1% versus 0.5% previously, although the 2024 forecast was revised lower (1.9% vs 2.4%). Inflation remains close to target next year at 2.1% (vs 2.0%) but is at target in 2025. Governor Macklem acknowledged that the BoC discussed the need for rates to remain higher for longer.

The BoC is still expecting slower growth (albeit less than in January), banking sector turbulence is a downside risk and the impact of previous monetary tightening is still to come. All good reasons for the pause and we suspect that the bias to tighten, still inherent in this statement, will not be required, if not by June, certainly by July.

CAD for now continues to track the US dollar relatively closely. On a year-to-date basis, CAD is 1.0% stronger than the US dollar. The 2yr swap spread has recently turned more favourably for CAD and is back to levels not seen since September last year (+5bps) when USD/CAD was trading between 1.3200-1.3400 and if this momentum continues we could see some further USD/CAD declines over the short-term. There was certainly nothing from the BoC yesterday to question that short-term risk. The US SPR announcement and the OPEC+ production cut will help crude oil prices as well.

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
IT	09:00	Italian Industrial Production (MoM)	Feb	0.5%	-0.7%	!
IT	09:00	Italian Industrial Production (YoY)	Feb	2.9%	1.4%	!
UK	09:30	BOE Credit Conditions Survey	--	--	--	!!!
UK	10:00	10-Year Treasury Gilt Auction	--	--	3.495%	!
EC	10:00	Industrial Production (YoY)	Feb	1.5%	0.9%	!
EC	10:00	Industrial Production (MoM)	Feb	1.0%	0.7%	!
US	12:00	OPEC Monthly Report	--	--	--	!
GE	12:45	German Buba President Nagel Speaks	--	--	--	!!
UK	13:30	NIESR Monthly GDP Tracker	--	0.1%	-0.1%	!!
US	13:30	Core PPI (MoM)	Mar	0.3%	0.0%	!!
US	13:30	Core PPI (YoY)	Mar	3.4%	4.4%	!!
US	13:30	PPI (MoM)	Mar	0.1%	-0.1%	!!
US	13:30	PPI ex. Food/Energy/Transport (YoY)	Mar	3.1%	4.4%	!!
US	13:30	PPI (YoY)	Mar	3.0%	4.6%	!!
US	13:30	PPI ex. Food/Energy/Transport (MoM)	Mar	0.1%	0.2%	!!
US	13:30	Initial Jobless Claims	--	232K	228K	!!
GE	13:45	German Current Account Balance n.s.a	Feb	--	16.2B	!
UK	14:00	BoE MPC Member Pill Speaks	--	--	--	!!!
CA	14:00	BoC Gov Macklem Speaks	--	--	--	!!!
GE	19:00	German Buba President Nagel Speaks	--	--	--	!!

Source: Bloomberg